IRS Installment Payment Plans
If you can pay your debt over time, an
installment plan may be the right solution.
The most widely used method for paying an old IRS debt is the
monthly installment agreement, or IA. If you owe $25,000 or less,
you should be able to get an installment payment plan for 60 months
just by asking for it. If you owe more than $25,000, you will have
to negotiate with the IRS to get an installment plan.
Warning! You must be current on this year's tax
returns. If IRS computers show that you haven't filed all
past due tax returns, you will not be eligible for an IA. Likewise,
if you are self-employed, you must be current on your quarterly
estimated tax payments for the current year. Finally, if you have
employees, you must be current on payroll tax deposits and Form 941
filings to get an IA.
But don't assume that a payment plan is your best option -- there
are definite drawbacks. The biggest is that interest and penalties
continue to accrue while you still owe. Combined with penalties,
the interest rate is often 8% to 10% per year. It's possible to pay
for years and owe more than when you started.
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In addition, if you have no leftover cash after living expenses, you're not in a position to negotiate a payment plan. At this point, your best bet is either submitting an offer in compromise, asking for a suspension of collection activities, or filing for Chapter 7 bankruptcy.
Negotiating a Monthly Payment
If you owe more than $25,000 or can't pay the amount you owe in
three years or less, your request for an IA begins with an IRS
collector's analyzing your Collection
Information Statement on Form 433-A. The collector uses the
information on the form to determine the amount you can pay.
Payment amounts are at the discretion of the IRS. If you deal with
eight different collectors, you might end up with eight different
IAs!
Nevertheless, here are some strategies for negotiating an
installment plan:
- Propose a payment plan you can live
with. Do this when you hand the completed Form 433-A to the
collector.
- Offer to pay at least the amount of your
income minus your necessary living expenses. This is the
cash you have left over every month after paying for the
necessities of life. Don't, however, promise to pay more than you
can afford just to get your plan approved. Promising the IRS more
than you can deliver is a serious mistake; once an IA is approved,
the IRS makes it difficult for you to renegotiate it.
- Give a first payment when you propose the agreement -- and keep making monthly payments even if the IRS hasn't yet approved your IA. Making voluntary payments demonstrates your good faith and creates a track record. For example, if you pay $200 a month for three months before your IA is approved, the collector may be inclined to believe that this is an appropriate amount.
If the IRS grants an installment plan, it may take several months to notify you in writing.
Making Monthly Payments
Until you receive written notice of approval, send payments to
your local service center using the payment slips and bar-coded
envelopes provided. If you don't want the IRS to know where you
bank, use a money order or cashier's check from another bank.
You have two other options for making payments once your IA is
approved:
- Use a direct payroll deduction.
Request a payroll deduction on Form 2159, Payroll Deduction Agreement. Your employer
must agree to send payments to the IRS each month using the IRS's
payment slips.
- Use a direct debit. Have your bank automatically debit your checking account each month and send a payment to the IRS. As long as you keep the account open, this is the most foolproof way to make sure you don't miss a payment and risk having the agreement revoked.
If the IRS Refuses Your Installment Agreement Proposal
If the IRS won't agree to installment payments, it is for one of
three reasons:
- Your living expenses are not all considered
necessary. The IRS may deem your expenses extravagant. For
example, if you have hefty credit card payments, make any
charitable contributions, or send your kids to private school,
expect the IRS to balk. Although reasonable people would disagree
on what is necessary and what is extravagant, the IRS is rather
stingy here.
- Information you provided on your Collection Information Statement, Form 433-A,
is incomplete or untruthful. The IRS may think you are
hiding property or income. For example, if public records show your
name on real estate or motor vehicles that you didn't list, or the
IRS received W-2 or 1099 forms showing more income than you listed,
be prepared to explain.
- You defaulted on a prior IA. While this doesn't automatically disqualify you from a new IA, it can cause your new proposal to be met with skepticism.
If your IA proposal is first rejected, you can keep negotiating. Ask to speak to the collector's manager. Just making this request is sometimes enough to soften the collector up. If you get nowhere with the manager, you can go over her head -- everyone at the IRS has a boss. You can complain to her immediate boss, then the collections branch chief, and then the district director. Squeaky wheels sometimes do get greased. Again, just talking about going up the ladder may cause a change in attitude at the lower rungs and get you a fair payment plan.
When the IRS Can Revoke an Installment Agreement
Once you receive approval of your IA, you and the IRS are bound
by the terms of the agreement, unless any of the following are
true:
- You fail to file your tax returns or pay
taxes that arose after the IA was entered into. Although IRS
computers do not continue to review your finances, they do monitor
you for filing future returns and making promised payments.
- You miss a payment. Under the terms
of all IAs, payments not made in full, and on time, can cause the
IA to be revoked immediately. In practice, the IRS usually waits 30
to 60 days before revocation -- at least on the first missed
payment. You are entitled to a warning or a chance to reinstate the
agreement.
- Your financial condition changes
significantly -- either for the better or worse. The IRS
usually won't find out about this unless you tell. The IRS may
review your situation every year or two, however, and require you
to submit a new Form 433-A in order to continue your IA.
- The IRS discovers that you provided inaccurate or incomplete information as part of the negotiation. For example, you may have omitted to mention certain valuable assets.
For more information on how to deal with the IRS to work out a
payment plan, see Stand Up to the IRS,
by Frederick W. Daily (Nolo).
Copyright 2011 Nolo
